Under current law, it is very difficult to get federal, state and private education loans discharged in bankruptcy.

The US Bankruptcy Code at 11 USC 523(a)(8) does not permit a bankruptcy discharge for three main types of education loans:

1. Education loans made, insured or guaranteed by a governmental unit
2. Education loans made under any program funded in whole or in part by a governmental unit or nonprofit institution
3. Education loans that are qualified education loans

These include the Perkins, Stafford, PLUS and Consolidation loans from the federal government, regardless of whether they were originated by a bank or other financial institution through the federally-guaranteed student loan program or were originated by the Direct Loan program. They also include state loan programs and private student loan programs.

This puts student loans in the same category as taxes, fines, court judgments and child support obligations. None of these can be discharged in bankruptcy.

There is, however, an exception when the nondischargeability "would impose an undue hardship on the debtor and the debtor's dependents". Unfortunately, Congress did not define what it meant by an undue hardship, so it has been left to the courts to clarify the Congressional intent.

In many cases bankruptcy courts will follow the precedent of Brunner v. New York State Higher Education Services Corporation (October 14, 1987, #41, Docket 87-5013) after a review of the specific circumstances of each case. This case specified a three-part test known as the Brunner Test for undue hardship discharges:

1. Minimal Standard of Living Test. That the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans.
2. Certainty of Hopelessness Test. That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans.
3. Good Faith Effort Test. That the debtor has made good faith efforts to repay the loans.

In practice the minimal standard of living test considers the monthly payments under the repayment plan that yields the lowest monthly payment. For federal loans this has been the income-contingent repayment plan . Starting July 1, 2009, the income-based repayment plan yields a lower monthly payment than the income-contingent repayment plan. Private student loans do offer income-contingent or income-based repayment, making them somewhat easier to discharge than federal education loans. Sometimes the bankruptcy judge will grant a partial discharge that reduces the debt to a level that satisfies the minimal standard of living test instead of granting a full discharge.

The certainty of hopelessness test requires demonstrating that the current inability to repay the debt is likely to persist for most of the life of the loan. Examples include disabilities and illnesses of the borrower or borrower's dependents that prevent or limit the borrower's employment. Since federal education loans provide for a cancellation of the debt in the event of the borrower's total and permanent disability, but private student loans do not, this is another difference that makes private student loans somewhat easier to discharge than federal education loans. Borrowers are also more likely to get a discharge if the inability to repay the debt is due to factors beyond the borrower's reasonable control.

The Brunner Test provides a very difficult standard for the discharge of federal and private education loans. Over the years, amendments to the US Bankruptcy Code have also made it more difficult for education loans to be discharged in bankruptcy. For example, the original bankruptcy code language from 1978 restricted the "nonprofit institution" clause to nonprofit institutions of higher education and did not include an exception to discharge for qualified education loans. The original language also allowed discharge for any education loan after five years since the loans entered repayment.

In recent years various members of Congress have proposed rolling back some or all of these changes. There is a growing consensus that the US Bankruptcy Code is perhaps a bit too harsh, especially with private student loans that offer fewer consumer protections than federal education loans. This includes legislative efforts by Rep. Danny K. Davis, Sen. Richard J. Durbin and Sen. Hillary Rodham Clinton. Rep. Davis's proposal would have allowed private student loans to be discharged after five years in repayment and would have closed the nonprofit institution loophole. Sen. Durbin's proposal would have allowed private student loans to be discharged, treating them the same as credit card debt. Sen. Clinton's proposal would have allowed new federal and private student loans to be discharged after seven years in repayment. So far, none of these efforts have been successful.